Head of emerging markets
Hermes Investment Management
In terms of sectors, we are overweight consumer discretionary, technology and financials:
- Technology in particular has changed from a cyclical to a non-cyclical sector, as it has become an essential part of modern life.
- Consumer discretionary names also present an interesting opportunity for investors due to the booming middle class in the developing world, which is projected to have a purchasing power of over $30 trillion by 2030. This growth is a secular trend, especially in China, India and Indonesia.
- We think the financial sector is cheap and well-placed from a cyclical point of view.
On the other hand, we are underweight in energy, materials and utilities. We have seen strong recoveries in these sectors but we remain cautious and expect to see a deceleration of growth in China – the impact of which may slow demand for global energy materials.
In terms of countries, we are overweight China, India and the UAE. Fears about China are misplaced, although the economy may slow and rumours of a potential trade war could also cause some issues. However, we do not believe that there is a significant downturn on the horizon.
We are also positive on the UAE, an area that a lot of investors are not focused on. We believe that the higher oil prices should prove to be positive and we have exposure to the economy through two stocks, one of which is Abu Dhabi Commercial Bank.
For some countries in emerging markets, the biggest risk to their economies is the possibility of a trade war, which according to press reports, is becoming more likely.
The likes of Taiwan, Korea and Brazil – which rely on exports to China – are particularly vulnerable. While we don’t know what tariffs may look like, a dislocation could be created in a sector such as automobiles. However, India is different to other emerging markets because it is not an exporter of commodities, which means its wider economy should remain unaffected.
Another risk to some developing countries is the withdrawal of US liquidity in the system, a consequence of higher interest rates. We’re likely to see the US Treasury issuing more bonds.
We have no exposure to Turkey due to our ongoing concerns about the economic policies being pursued by the administration. We are also watching Argentina with caution, as inflation levels are too high and the country is heavily dependent on global liquidity.
While from a top-down view Malaysia’s economy has no red flags, from the bottom-up we haven’t identified quality companies that match our ESG and investment criteria. We’re also avoiding Venezuela for reasons obvious to all investors!
Looking closely at Egypt, we think it is becoming distinctly more attractive, and we have recently taken a position in an Egyptian firm. Newly discovered natural gas resources, low labour costs, high literacy levels and a series of economic reforms suggest that real investment opportunities are shimmering on the sands. All of these factors have resulted in us taking a deeper dive into the country.